Will the Trans-Pacific Partnership ever be ratified? Should it be?

The Trans-Pacific Partnership is back in the news. A new wave of controversy surrounds this huge trade deal, which has been agreed to, in principle, by 12 nations, but not yet ratified. Its adherents say that it would boost U.S. economic growth. Its detractors say that it would destroy more U.S. manufacturing jobs and doesn’t go far enough to halt environmental abuse.1

Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam have all committed to joining the TPP. These 12 countries generate about 40% of the world’s economic growth and about a third of global commerce. At least six of these nations must ratify the TPP in order for it to operate, and two of those six nations must be Japan and the United States. Therein lies the obstacle. Lawmakers in both Japan and the U.S. will certainly debate the merits of the agreement on the way to a 2017 vote, and there is a real possibility the deal could be struck down.1

What does the TPP aim to achieve? It would lower taxes on imports and exports – and get rid of them altogether in some instances. It would require other nations to adopt U.S. copyright terms on intellectual property (life of the creator + 70 years), counterattacking the flow of bootleg copies of movies, TV shows, and music plaguing entertainment firms.1

While the TPP does seek to remedy issues involving worker rights, climate change, overfishing, and the illegal killing and sale of exotic animals, it also gives private companies the opportunity to sue foreign governments. A privately held firm based in one TPP nation could, potentially, sue a government of another TPP nation if it felt that nation’s environmental laws had hurt its profits or caused it financial losses.1

The Obama administration has championed the TPP for years. After President Obama leaves office, it may be that his successor will not support it at all.

Donald Trump has called it a “terrible deal” that would constitute a “death blow” for the U.S. manufacturing sector. Hillary Clinton – who at first supported the TPP when she was Secretary of State – no longer supports the pact.1

Detractors of NAFTA see NAFTA all over again in the TPP. Unions, including the AFL-CIO, see the deal siphoning away U.S. jobs overseas. Environmental groups, like the Sierra Club, say it isn’t green enough. Advocates for online freedom and global health care have voiced their disapproval with TPP regulations. There is strong opposition to the TPP in our Congress and in Japan’s legislature.1

What does China think of the TPP? It has stayed on the sidelines during the agreement’s evolution. China already has free trade pacts in place with most TPP member nations, so it doesn’t really need to become a TPP member.1

In fact, the TPP can be considered a retort to China’s own long-planned, multilateral trade deal, the Regional Comprehensive Economic Partnership (RCEP). If enacted, the RCEP would position China as the economic kingpin in a free trade alliance of many Asian nations. The U.S. has not been invited to join the RCEP.1,2

Is the TPP doomed? The odds of its passage in Congress may be lengthening. “Fast track” legislation intended to usher in that passage fell through earlier this year. Approval in the waning months of the Obama administration appears to be a longshot. This summer, Democrats nearly attached language opposing the TPP to their 2016 presidential campaign platform, and Republicans approved a platform statement opposing votes on major trade deals “in a Lame Duck Congress.” It appears it may be “now or never” for the TPP, and, after 2016, there is a real chance this long-envisioned trade pact may never get off the ground.3
Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

What steps should you take?

Whether you shop online routinely or infrequently, the risk of identity theft rises as you offer more and more information about yourself online.

Avoid using a debit card, and use only one credit card. If your debit card gets hacked, the thieves may be able to access your bank account. But if you use just one credit card for online shopping, you will have only one card to cancel if your card number is compromised. (It would also be wise to keep a low credit limit on that particular card.)

Look for the “https://” before you enter personal information. When you see that (look for the “s”), it should indicate that you are transmitting data within a secure site. Depending on your browser, you may also see a padlock symbol at the bottom of the browser window

Watch what you click – and watch out for fake sites. Pop-ups, attachments from mysterious sources, dubious links – do not be tempted to explore where they lead. Hackers have created all manner of “phishing” sites and online surveys – seemingly legitimate, but set up to siphon your information. It is better to be skeptical.

Protect your PC. When did you install the security and firewall programs on your computer? Have you updated them recently?

Change stored passwords frequently. Make them unique and obscure. It is a good idea to change or update your passwords once in a while. Mix letters and numbers, and use an uppercase letter if possible. Never use “password” or your birth date as your password!

Don’t shop using an unsecured wi-fi connection. You are really leaving yourself open to identity theft if you shop using public wi-fi. Put away the laptop and wait until you are on a secure, private internet connection. Hackers can tap into your Smartphone via the same tactics by which they can invade your PC.

Mike Moffitt may be reached at ph#641-344-0328 or email mikem@cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

Doing the right things at the right time may leave you wealthier later.

What can you do to start building wealth before age 35? You know time is your friend and that the earlier you begin saving and investing for the future, the better your financial prospects may become. So what steps should you take?

Reduce your debt. You probably have some student loan debt to pay off. According to the Institute for College Access and Success, which tracks college costs, the average education debt owed by a college graduate is now $28,950. Hopefully, yours is not that high and you are paying off whatever education debt remains via an automatic monthly deduction from your checking account. If you are struggling to pay your student loan off, take a look at some of the income-driven repayment plans offered to federal student loan borrowers, and options for refinancing your loan into a lower-rate one (which could potentially save you thousands).1

You cannot build wealth simply by wiping out debt, but freeing yourself of major consumer debts frees you to build wealth like nothing else. The good news is that saving, investing, and reducing your debt are not mutually exclusive. As financially arduous as it may sound, you should strive to do all three at once. If you do, you may be surprised five or ten years from now at the transformation of your personal finances.

Save for retirement. If you are working full-time for a decently-sized employer, chances are a retirement plan is available to you. If you are not automatically enrolled in the plan, go ahead and sign up for it. You can contribute a little of each paycheck. Even if you start by contributing only $50 or $100 per pay period, you will start far ahead of many of your peers.1

Away from the workplace, traditional IRAs offer you the same perks. Roth IRAs and Roth workplace retirement plans are the exceptions – when you “go Roth,” your contributions are not tax-deductible, but you can eventually withdraw the earnings tax-free after age 59½ as long as you abide by IRS rules.1,2

Workplace retirement plans are not panaceas – they can charge administrative fees exceeding 1% and their investment choices can sometimes seem limited. Consumer pressure is driving these administrative fees down, however; in 2015, they were lower than they had been in a decade and they are expected to lessen further.3

Keep an eye on your credit score. Paying off your student loans and getting started saving for retirement are a great start, but what about your immediate future? You’re entitled to three free credit reports per year from TransUnion, Experian, and Equifax. Take advantage of them and watch for unfamiliar charges and other suspicious entries. Be sure to get in touch with the company that issued your credit report if you find anything that shouldn’t be there. Maintaining good credit can mean a great deal to your long-term financial goals, so monitoring your credit reports is a good habit to get into.1

Do not fear Wall Street. We all remember the Great Recession and the wild ride investments took. The stock market plunged, but then it recovered – in fact, the S&P 500 index, the benchmark that is synonymous in investing shorthand for “the market,” gained back all the loss from that plunge in a little over four years. Two years later, it reached new record peaks, and it is only a short distance from those peaks today.4

Equity investments – the kind Wall Street is built on – offer you the potential for double-digit returns in a good year. As interest rates are still near historic lows, many fixed-income investments are yielding very little right now, and cash just sits there. If you want to make your money grow faster than inflation – and you certainly do – then equity investing is the way to go. To avoid it is to risk falling behind and coming up short of retirement money, unless you accumulate it through other means. Some workplace retirement plans even feature investments that will direct a sizable portion of your periodic contribution into equities, then adjust it so that you are investing more conservatively as you age.

Invest regularly; stay invested. When you keep putting money toward your retirement effort and that money is invested, there can often be a snowball effect. In fact, if you invest $5,000 at age 25 and just watch it sit there for 35 years as it grows 6% a year, the math says you will have $38,430 with annual compounding at age 60. In contrast, if you invest $5,000 each year under the same conditions, with annual compounding you are looking at $596,050 at age 60. That is a great argument for saving and investing consistently through the years.5

Mike Moffitt may be reached at ph#: 641-782-5577 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

What degree of difference could they make for you in retirement?

At a certain age, you are allowed to boost your yearly retirement account contributions. For example, you can direct an extra $1,000 per year into a Roth or traditional IRA starting in the year you turn 50.1

Your initial reaction to that may be: “So what? What will an extra $1,000 a year in retirement savings really do for me?”

That reaction is understandable, but consider also that you can contribute an extra $6,000 a year to many workplace retirement plans starting at age 50. As you likely have both types of accounts, the opportunity to save and invest up to $7,000 a year more toward your retirement savings effort may elicit more enthusiasm.1,2

What could regular catch-up contributions from age 50-65 potentially do for you? They could result in an extra $1,000 a month in retirement income, according to the calculations of retirement plan giant Fidelity. To be specific, Fidelity says that an employee who contributes $24,000 instead of $18,000 annually to the typical employer-sponsored plan could see that kind of positive impact.2

To put it another way, how would you like an extra $50,000 or $100,000 in retirement savings? Making regular catch-up contributions might help you bolster your retirement funds by that much – or more. Plugging in some numbers provides a nice (albeit hypothetical) illustration.3

Even if you simply make $1,000 additional yearly contributions to a Roth or traditional IRA starting in the year you turn 50, those accumulated catch-ups will grow and compound to about $22,000 when you are 65 if the IRA yields just 4% annually. At an 8% annual return, you will be looking at about $30,000 extra for retirement. (Besides all this, a $1,000 catch-up contribution to a traditional IRA can also reduce your income tax bill by $1,000 for that year.)3

If you direct $24,000 a year rather than $18,000 a year into one of the common workplace retirement plans starting at age 50, the math works out like this: you end up with about $131,000 in 15 years at a 4% annual return, and $182,000 by age 65 at an 8% annual return.3

If your financial situation allows you to max out catch-up contributions for both types of accounts, the effect may be profound indeed. Fifteen years of regular, maximum catch-up contributions to both an IRA and a workplace retirement plan would generate $153,000 by age 65 at a 4% annual yield, and $212,000 at an 8% annual yield.3

The more you earn, the greater your capacity to “catch up.” This may not be fair, but it is true.

Fidelity says its overall catch-up contribution participation rate is just 8%. The average account balance of employees 50 and older making catch-ups was $417,000, compared to $157,000 for employees who refrained. Vanguard, another major provider of employer-sponsored retirement plans, finds that 42% of workers aged 50 and older who earn more than $100,000 per year make catch-up contributions to its plans, compared with 16% of workers on the whole within that demographic.2

Even if you are hard-pressed to make or max out the catch-up each year, you may have a spouse who is able to make catch-ups. Perhaps one of you can make a full catch-up contribution when the other cannot, or perhaps you can make partial catch-ups together. In either case, you are still taking advantage of the catch-up rules.

Catch-up contributions should not be dismissed. They can be crucial if you are just starting to save for retirement in middle age or need to rebuild retirement savings at mid-life. Consider making them; they may make a significant difference for your savings effort.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

A worldwide selloff occurs after the United Kingdom votes to leave the European Union.

A wave of anxiety hit Wall Street Friday morning. Thursday night, the United Kingdom elected to become the first nation state to leave the European Union. The “Brexit” can potentially be finalized as soon as the summer of 2018.1

Voters in England, Scotland, Wales, and Northern Ireland were posed a simple question: “Should the United Kingdom remain a member of the European Union (E.U.) or leave the European Union?” Seventy-two percent of the U.K. electorate went to the polls to answer the question, and in the final tally, Leave beat Remain 51.9% to 48.1%.2,3

The vote shocked investors worldwide. The threat of a Brexit was supposed to have decreased. As late as Thursday, key opinion surveys showed the Remain camp ahead of the Leave camp – but at 10:40pm EST Thursday, the BBC called the outcome and projected Leave would win.4

Why did Leave triumph? The leaders of the Leave campaign hammered home that E.U. membership was a drag on the U.K. economy. They criticized E.U. regulations that impeded business growth. They felt that the U.K. should no longer contribute billions of pounds per year to the E.U. budget. They had concerns over E.U. immigration laws, which permit free movement of people among E.U. nations without visas.1

At the opening bell Friday, the Dow Jones Industrial Average was down 408 points. The Nasdaq shed 186 points at the open; the S&P, 37 points.7

Fortunately, the first trading day after the Brexit referendum was a Friday, giving Wall Street a pause to absorb the news further over the weekend.

How could the Brexit impact investors & markets going forward? Consider its near-term ripple effect, which could be substantial.

The Brexit could deal a devastating blow to both the United Kingdom and the European Union. Depending on which measurements you use, the E.U. collectively represents either the first or third largest economy in the world. In terms of international trade, its import and export activity surpasses that of China (and that of the United States).2

An analysis by the U.K.’s Treasury argued that the country would be left “permanently poorer” by the Brexit, with less tax revenue and lower per-capita GDP and productivity. The Brexit certainly hurt the U.K.’s major trading partners, which include China, India, Japan, and the United States. Some Chinese and American companies have established operations in the U.K. specifically to take advantage of its E.U. membership and the free trade corridors it opens. With the U.K. exiting the E.U., the profits of those firms may be reduced – and the U.K. will have to quickly negotiate new trade deals with other nations. The most recently available European Commission data shows that in 2014, U.S. direct investment in the E.U. topped €1.8 trillion (roughly $2 trillion), with a slightly greater amount flowing back to the U.S.2

You could also see a sustained flight to the franc, the yen, and the dollar in the coming weeks. The stronger the dollar becomes, the weaker the demand for American exports.

Investors should hang on through the turbulence. The Brexit is a historic and unsettling moment, but losses on Wall Street may be less severe than those happening overseas. Retirement savers should not mistake this disruption of market equilibrium for the state of the market going forward. A year, a month, or even a week from now, Wall Street may gain back all that was lost in the Brexit vote’s aftermath. Historically, it has recovered from many events more dramatic than this.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

Converting a traditional IRA to a Roth IRA is no easy decision. After all, it is a taxable event. When the stock market is down or sluggish, however, a Roth conversion has more appeal.

Traditional IRA owners “go Roth” for some very good reasons. A Roth IRA can be a resource for tax-free retirement money. When you are 59½ or older and have owned a Roth IRA for at least five tax years, you can make tax-free withdrawals from your account.1

Original owners of Roth IRAs never have to contend with Required Minimum Distributions (RMDs). They can also contribute to their IRA all their lives, provided they have earned income below a certain ceiling.2,3

In a sense, a Roth IRA functions as a tax management tool in retirement; you can put just about any investment subject to taxable income into a Roth IRA and forego paying taxes on that income in the future.3

Many people retire to a lower tax bracket. That fact alone is a good argument for timing a Roth conversion to coincide with retirement.

For example, say you contribute to a traditional IRA while you are working, all while you are in the 25% federal income tax bracket. Those contributions come with a perk; you may be saving up to 25 cents on every dollar you put into that traditional IRA, because traditional IRA contributions are tax-deductible in many instances. In this scenario, as you retire, you drop into the 15% federal income tax bracket. Making a Roth conversion at this point also comes with a perk: the conversion now costs 15 cents on the dollar instead of 25 cents on the dollar.3

Why is a poor year for stocks an auspicious moment for a Roth conversion? In a beaten-down market, the cost of conversion can be lower for retirees and pre-retirees alike.

As a mock example, suppose you own a traditional IRA that had a balance of $180,000 at the end of last year. You had hoped the bull market would push its value higher this year, but then the market waned, and now your traditional IRA is worth $170,000. Bad news, yes; if you want to “go Roth” with that IRA, though, there is a silver lining. The lower value of your traditional IRA means the tax bill on the conversion (i.e., the tax owed on the distribution of assets out of the traditional IRA) will be slightly lower. Additionally, when the market rallies in the future, you get growth in a Roth IRA with the potential for tax-free withdrawals, rather than growth in a traditional IRA where withdrawals will be taxed as regular income.4

Other financial factors can make a Roth conversion opportune. If you are unemployed, have major health care expenses, or face a net operating loss (NOL), it may also be a good time for this move. Any of these circumstances could leave you in a lower income tax bracket. An NOL, in fact, can offset the taxable income resulting from the conversion.4

If you are retired and in a low income tax bracket and have not yet claimed Social Security, those three factors may put you in a nice position for a Roth conversion.

A Roth conversion need not be all-or-nothing. Some traditional IRA owners opt for partial conversions; they “go Roth” with just a portion of their traditional IRA funds. A Roth conversion can even be recharacterized; that is, undone. If you want to undo a Roth conversion, in most cases, you have until October 15 of the following tax year to do so.5

When is a Roth conversion a bad idea? A few scenarios come to mind. One, you lack the ability to pay the income tax resulting from the conversion. Two, you are positive that you will be in a lower tax bracket than you are now when you start taking RMDs from your traditional IRA. Three, you have plans to relocate to a state with minimal or no state income tax. Four, you think you might make a major charitable IRA gift either at or before your death. Five, you are in your peak earning years and, correspondingly, in the highest tax bracket of your lifetime.

A Roth conversion is not for everyone, but it could be for you. The short-term tax hit may be a small price to pay for the potential benefits ahead. If you want to explore this move, by all means, talk with a tax or financial professional first. That conversation is essential.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

On May 2, Puerto Rico defaulted on its debt again. As it managed to negotiate with some of its creditors, its Government Development Bank did pay part of the $422 million it owed this week, but about $270 million in payments were missed.1,2

Puerto Rico’s fiscal crisis made headlines last year when its total debt passed $70 billion, more than any U.S. state except for New York and California. Its government has defaulted three times on its debt since the start of 2015.3,4

Puerto Rico has been in a recession for the better part of a decade. About 45% of Puerto Ricans live in poverty, and people are leaving the commonwealth at a rate of 1,500 a week. Its schools, hospitals, and social services programs have already been hit with severe budget cuts.3,5

On May 1, Governor Alejandro García Padilla called the default “a painful decision,” but also a necessary one. Faced simultaneously with “the inability to meet the demands of our creditors and the needs of our people, I had to make a choice. I decided that essential services for the 3.5 million American citizens in Puerto Rico came first.”5

July 1 presents a critical deadline. On that day, the commonwealth must make about $2 billion in debt payments. Analysts are highly skeptical that Puerto Rico will be able to do that.1

Will Congress intervene? The pressure is certainly mounting on Capitol Hill lawmakers.

Will a bailout be necessary? Maybe not. Last spring, the House Natural Resources Committee attempted to put together a relief bill in response to the crisis. If passed, it would not represent a bailout, as it would not deliver any federal money to Puerto Rico. The bill is still in the works.1

In 2015, House Speaker Paul Ryan (R-WI) gave Congress a March 31, 2016 deadline to address this issue, but that deadline came and went without action. Treasury Secretary Jack Lew and the White House implored Congress to address the problem this week. In a letter to congressional leaders, Lew stated that minus “a workable framework for restructuring Puerto Rico’s debts, bondholders will experience a lengthy, disorderly, and chaotic unwinding, with non-payment for many a real possibility.”1,2

Lew also warned that without legislation including “appropriate restructuring and oversight tools, a taxpayer-funded bailout may become the only legislative course available to address an escalating crisis.” Since Puerto Rico is not a state, a Chapter 9 bankruptcy is not an option.4,5

What does this mean for bond investors? Greater levels of concern. American investors have bought Puerto Rico’s bonds for years, as they are exempt from federal and state income tax. Earlier this year, the commonwealth defaulted on $37 million of bonds issued by the Puerto Rico Infrastructure Financing Authority, which were not constitutionally backed. This week, Puerto Rico defaulted on bonds backed by its Government Development Bank. If the GDB cannot make the huge debt payment due July 1, then Puerto Rico will default on some of the general obligation bonds issued by its government.4

Most municipal bond funds have sold off their Puerto Rican debt and have not been greatly affected by these developments. Small investors holding Puerto Rican debt can take some solace in the fact that several Puerto Rican bonds are insured; in case of a default, the principal and interest would be protected by a bond insurance company. Contrast that with the plight of the funds still heavily invested in distressed Puerto Rican debt; as the commonwealth cannot declare bankruptcy, they may have to turn to regular courts in pursuit of payouts.4

Mike Moffitt may be reached at ph# 641-464-2248 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

What is cost basis? Stepped-up basis? How does the home sale tax exclusion work?

At some point in our lives, we may inherit a home or another form of real property. In such instances, we need to understand some of the jargon involving inherited real estate. What does “cost basis” mean? What is a “step-up?” What is the home sale tax exclusion, and what kind of tax break does it offer?

Very few parents discuss these matters with their children before they pass away. Some prior knowledge of these terms may make things less confusing at a highly stressful time.

Cost basis is fairly easy to explain. It is the original purchase price of real estate plus certain expenses and fees incurred by the buyer, many of them detailed at closing. The purchase price is always the starting point for determining the cost basis; that is true whether the purchase is financed or all-cash. Title insurance costs, settlement fees, and property taxes owed by the seller that the buyer ends up paying can all become part of the cost basis.1

At the buyer’s death, the cost basis of the property is “stepped up” to its current fair market value. This step-up can cut into the profits of inheritors should they elect to sell. On the other hand, it can also reduce any income tax liability stemming from the transaction.2

Here is an illustration of stepped-up basis. Twenty years ago, Jane Smyth bought a home for $255,000. At purchase, the cost basis of the property was $260,000. Jane dies and her daughter Blair inherits the home. Its present fair market value is $459,000. That is Blair’s stepped-up basis. So if Blair sells the home and gets $470,000 for it, her complete taxable profit on the sale will be $11,000, not $210,000. If she sells the home for less than $459,000, she will take a loss; the loss will not be tax-deductible, as you cannot deduct a loss resulting from the sale of a personal residence.1

The step-up can reflect more than just simple property appreciation through the years. In fact, many factors can adjust it over time, including negative ones. Basis can be adjusted upward by the costs of home improvements and home additions (and even related tax credits received by the homeowner), rebuilding costs following a disaster, legal fees linked to property ownership, and expenses of linking utility lines to a home. Basis can be adjusted downward by property and casualty insurance payouts, allowable depreciation that comes from renting out part of a home or using part of a residence as a place of business, and any other developments that amount to a return of cost for the property owner.1

The Internal Revenue Code states that a step-up applies for real property “acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent.” In plain English, that means the new owner of the property is eligible for the step-up whether the deceased property owner had a will or not.2

In a community property state, receipt of the step-up becomes a bit more complicated. If a married couple buys real estate in Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, or Wisconsin, each spouse is automatically considered to have a 50% ownership interest in said real property. (Alaska offers spouses the option of a community property agreement.) If a child or other party inherits that 50% ownership interest, that inheritor is usually entitled to a step-up. If at least half of the real estate in question is included in the decedent’s gross estate, the surviving spouse is also eligible for a step-up on his or her 50% ownership interest. Alternately, the person inheriting the ownership interest may choose to value the property six months after the date of the previous owner’s death (or the date of disposition of the property, if disposition occurred first).2,3

In recent years, there has been talk in Washington of curtailing the step-up. So far, such notions have not advanced toward legislation.4

What if a parent gifts real property to a child? The parent’s tax basis becomes the child’s tax basis. If the parent has owned that property for decades and the child cannot take advantage of the federal home sale tax exclusion, the capital gains tax could be enormous if the child sells the property.2

Who qualifies for the home sale tax exclusion? If individuals or married couples want to sell an inherited home, they can qualify for this big federal tax break once they have used that home as their primary residence for two years out of the five years preceding the sale. Upon qualifying, a single taxpayer may exclude as much as $250,000 of gain from the sale, with $500,000 being the limit for married homeowners filing jointly. If the home’s cost basis receives a step-up, the gain from the sale may be small, but this is still a nice tax perk to have.5

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.